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The Technology Treadmill

More than any other factor, technology has shaped and defined the productivity of today’s agriculture. Adoption of technology is the primary reason the average farmer today grows enough food to feed 140 people, up from about 25 in 1960.

But it isn’t always an easy story. Technology is also the reason why real prices of farm commodities have trended down for close to a century, and why the exodus of farmers from the industry has gotten even faster over the last two generations.

If we see another doubling in the number of consumers who are fed by the average farmer, what will the countryside look like?

Rhonda Skaggs, agricultural economist at New Mexico State University, points out that until the early 1900s, global farm output grew because farmers put more and more acres under the plow. Since 1920, however, the growth in farm output has been primarily a result of technological advances in mechanization, chemicals, fertilizers and seed.

As Skaggs says, “New technologies expand output and reduce unit production costs of producers.”

But technology can seem a fickle master. “Technology reduces the per-unit costs of production and increases the output of a few early adopting producers, so for a short time their net returns are higher than non-adopting producers,” Skaggs says. “However, when widespread adoption of new technology happens, the increased production lowers the price of the commodity for all producers.”

As real prices decline because of the increased production, growers again look for new ways to increase production or to reduce costs. The result is referred to as the technological treadmill.

Producers who keep on the treadmill and who are early adopters of new technology are rewarded with better profit margins from higher yields and lower production costs. Growers who resist technology face declining margins and are eventually forced out of production of the commodity. Many of these farmers will either leave the industry altogether or end up having to supplement their farm income through off-farm employment.

Recently, some farmers have adopted a new response to the technology treadmill. Their strategy is to step off the treadmill by developing niche markets for their production.

Instead of being price takers, these growers are implementing strategies like organics or animal-welfare practices to differentiate their output in a way that enables them to capture premiums over commodity prices, thereby mitigating the effect new technology has on prices.

Does it pay to ride the treadmill?

“Farmers are always looking for the next thing that will make money,” says Eric DeVuyst, economist at Oklahoma State University. “Before adopting any new technology, you need to compare the projected returns with the costs of adopting the technology.”

Most farmers are familiar with financial tools like partial budgeting, enterprise budgeting, whole-farm budgeting, cash flow budgeting, and capital budgeting. DeVuyst says producers now need to use one or more of these budgeting tools to determine if adopting a new technology will have a positive impact on the farm business.

But those tests aren’t enough, DeVuyst says. Instead, he believes there are three additional factors that growers must evaluate before adopting a new technology, including scale, risk and reversibility.

Scale measures the percentage of the business which will be impacted by adopting a new technology. For example, the decision to change your seeding system will have a much bigger impact on the business than changing to a different variety of seed for one of the crops grown on a farm.

Risk really depends on the amount of knowledge you have about the new technology before you make the change. While there are many third-party variety trials from which growers can gather good information before trying a new variety, there can be a lot less third-party testing of other inputs.

Reversibility looks at the costs to “undo” a switch to a new technology. For instance, reversibility costs can be relatively low for growers who decide to change back to a variety of crop they used to grow. However a cattleman who decides to change the hide colour of his breeding herd is making a decision which is much harder to reverse.

Even though scale, risk and reversibility have real value, this value isn’t considered in the budgeting tools farmers typically use when making technology choices. In fact, DeVuyst says there aren’t tools available for growers to easily consider these factors in making investment decisions.

But that doesn’t mean these factors can be ignored. Rather, DeVuyst feels growers need to pay even more attention to what he calls “real options.”

“Just like put and call options in marketing, real options in decision making have a value,” DeVuyst says. “They give you the opportunity to take an action should future changes make the action profitable.”

In his paper “Evaluation of investment in agriculture technology” DeVuyst cites the example of a beef breeder using tenderness markers for selecting seed stock.

Because commodity markets do not reward producers for selecting on the basis of tenderness, budget tools would suggest this is not profitable. However, if markets change and begin offering incentives for tenderness, then the breeder who has already selected for tenderness will be in a better position to quickly profit from this change.

“Besides just running the budget numbers, producers need to think about the real options that a change in production practices may offer,” DeVuyst says. “Producers need to realize that budget tools do not address risk and reversibility when used to analyze new technology.”

There is a huge spread in the costs of production between growers. Early adopters of good technology reduce their cost per unit produced. Those who ignore the benefits of technology, or worse yet, pay a premium for technology that provides no benefit, end up with higher costs per unit produced.

Successful producers are those who know how to keep up on the technology treadmill.CG


8 Steps To Profiting FromThe Technology Treadmill

.Define your goal. Do you want the technology to increase your profitability? Or is

your need more specific, such as reducing labour, increasing land base, reduce risk, or something else?

.Determine what resources you have available to invest in the new technology (land,

labour, capital, etc.).

.Gather credible information about expected costs and benefits of the technology. In

addition to detailed information from manufacturers and suppliers, look for third-party information and on-farm experience.

.Use the appropriate budget tool to fully analyze the impact the change will have on your

operation (partial budget, enterprise budget, whole farm budget, etc.).

.Evaluate the risk and uncertainty of adopting the change. Do you know the risks or is the

technology still so young that the risks are uncertain?

.Determine if adoption of the new technology offers any new opportunities for your farm.

Or will it close any of them off? What is the potential value of those opportunities?

.Develop an implementation plan. Adopt the technology on a scale that is manageable,

then measure its results. Know in advance what you will do if the technology performs better — or worse — than expected

.At scheduled intervals after adoption, analyze the success of the technology. Then either

maintain, refine or reverse the action based on whether your initial goals are being met.

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